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That's a good point. So more precisely, at any instant your current risk is capped. I think that's more important, since it defines your worst case outcome. You

That's a good point. So more precisely, at any instant your current risk is capped. I think that's more important, since it defines your worst case outcome. You could keep buying new cars, and after the 20th one is stolen go bankrupt, but you probably wouldn't do that if you can't afford it, so bankruptcy isn't a possible outcome. The capped instantaneous risk lets you go for the option with highest expected value without having some chance you'll get instantly bankrupted.

caf 6y ago
I don't think it works like that. If you're just talking about avoiding bankruptcy, well you could just buy a car and not replace it the first time if it's stolen/destroyed. Presumably in this scenario you actually require a car. That said, insuring it will cover you for any number of losses in the year, whereas setting aside an amount of savings equal to the value of the car will cover you for only one loss. You can't just be chasing the positive EV when the variance is potentially large. For example, if Warren Buffet offered to flip a coin with you for your net worth, plus $100 bonus if you win, the expected value is very slightly positive but I believe you'd be unwise to take bet that unless your current net worth was very low already.
- pushrax 6y ago
  The risk depends on your net worth and earning power, as you allude to. Your net worth might have low variance if the ratio between it and your car's cost is high. This is the most precise way to phrase the original recommendation. Don't get insurance for things that are easy for you tolerate the variance on. That can be true if you buy a cheap car and are pretty well off. What's the actual chance your car gets stolen 3 times in a year? After the first 2 times maybe you could change the place you store your car, get a GPS tracker or something? There were 6858 vehicles stolen in NYC in 2020 (nearly doubled 2019) [0]. There are roughly 2M cars registered in NYC [1]. That's a 1 in 300 yearly chance to have your car stolen at least once. If we assume events are uncorrelated, there's a 1 in 100000 chance of two or more thefts, and a 1 in 25000000 chance of three or more. The odds of dying in a motor vehicle accident in the next year is something like 1 in 8000 [2]. That aside, there's all sorts of optional coverage that most people definitely can tolerate the variance on without calculation. > You can't just be chasing the positive EV when the variance is potentially large. There are many investment strategies that are exactly this. Writing options is one example. Forgoing insurance, like option writing, isn't possible without sufficient collateral of your own. I recognize that this is not possible for everyone. There are some cheap cars that work fine though. The biggest takeaway is to second guess the sales pitch on premium insurance plans. Your example is another instant bankruptcy case, with reward that doesn't come close to compensating the risk. [0]: https://www.nytimes.com/2021/01/06/nyregion/car-thefts-nyc.html https://www.nytimes.com/2021/01/06/nyregion/car-thefts-nyc.h... [1]: https://dmv.ny.gov/statistic/2018reginforce-web.pdf https://dmv.ny.gov/statistic/2018reginforce-web.pdf [2]: https://www.iii.org/fact-statistic/facts-statistics-mortality-risk https://www.iii.org/fact-statistic/facts-statistics-mortalit...

caf 6y ago

I don't think it works like that. If you're just talking about avoiding bankruptcy, well you could just buy a car and not replace it the first time if it's stolen/destroyed. Presumably in this scenario you actually require a car. That said, insuring it will cover you for any number of losses in the year, whereas setting aside an amount of savings equal to the value of the car will cover you for only one loss. You can't just be chasing the positive EV when the variance is potentially large. For example, if Warren Buffet offered to flip a coin with you for your net worth, plus $100 bonus if you win, the expected value is very slightly positive but I believe you'd be unwise to take bet that unless your current net worth was very low already.

pushrax 6y ago
The risk depends on your net worth and earning power, as you allude to. Your net worth might have low variance if the ratio between it and your car's cost is high. This is the most precise way to phrase the original recommendation. Don't get insurance for things that are easy for you tolerate the variance on. That can be true if you buy a cheap car and are pretty well off. What's the actual chance your car gets stolen 3 times in a year? After the first 2 times maybe you could change the place you store your car, get a GPS tracker or something? There were 6858 vehicles stolen in NYC in 2020 (nearly doubled 2019) [0]. There are roughly 2M cars registered in NYC [1]. That's a 1 in 300 yearly chance to have your car stolen at least once. If we assume events are uncorrelated, there's a 1 in 100000 chance of two or more thefts, and a 1 in 25000000 chance of three or more. The odds of dying in a motor vehicle accident in the next year is something like 1 in 8000 [2]. That aside, there's all sorts of optional coverage that most people definitely can tolerate the variance on without calculation. > You can't just be chasing the positive EV when the variance is potentially large. There are many investment strategies that are exactly this. Writing options is one example. Forgoing insurance, like option writing, isn't possible without sufficient collateral of your own. I recognize that this is not possible for everyone. There are some cheap cars that work fine though. The biggest takeaway is to second guess the sales pitch on premium insurance plans. Your example is another instant bankruptcy case, with reward that doesn't come close to compensating the risk. [0]: https://www.nytimes.com/2021/01/06/nyregion/car-thefts-nyc.html https://www.nytimes.com/2021/01/06/nyregion/car-thefts-nyc.h... [1]: https://dmv.ny.gov/statistic/2018reginforce-web.pdf https://dmv.ny.gov/statistic/2018reginforce-web.pdf [2]: https://www.iii.org/fact-statistic/facts-statistics-mortality-risk https://www.iii.org/fact-statistic/facts-statistics-mortalit...